19 March 2018

The Rays' New Media Deal Won't Help Them Compete With The O's

According to the Sports Business Journal, the Rays are in discussions to sign a long-term extension with Fox Sports Sun. Fox is expected to offer roughly $50M in 2019, and offer an average of $82M per year. If this is accurate, and presuming a linear rate of increase, this would result in an increase of 6.5% per year.

Such a large annual increase would be odd. Normally, baseball media rights deals result in a yearly increase between 3% and 4%. It’s worth noting that a 3.5% linear yearly increase of a 15 year deal starting at $50M would result in the Rays receiving $82M in the last year. This makes me wonder if the deal doesn’t offer $82M per year, but rather $82M in its final year. If this is in fact the case, the Rays would receive $980 million for 15 years as opposed to the $1.2 billion over 15 years they’d receive if they did get an annual increase of 6.5%. Then again, the Rays received $15M in 2012 but the Sports Business Journal claims they received $35M in 2017.

In recent years, both the Diamondbacks and Cardinals have signed new media rights deals and details of these deals have made it into the media (the Reds also extended their media rights deals, but no one has been able to report the terms). Here’s how the Rays' deal (using both 3.5% annual increases and 6.5% annual increases) compare to the Cardinals' and Diamondbacks' deals.

Depending on which annual increase is used, the Rays' deal is either slightly better than the Cardinals' and Diamondbacks' deal or slightly worse, but either are in a similar category. In either case, the Rays would start out earning slightly less than the Diamondbacks or Cardinals, but could end up receiving slightly more depending on the final terms.

While it has been reported that the Rays aren’t allowed to broadcast their games in the Miami DMA, both MASN and the RSDC stated in the MASN case that the Rays media territory includes the Miami DMA. Presuming this is accurate, then the Rays' media territory has roughly 7.2 million cable and satellite subscribers, of which 1.7 million are in its core market of the St Petersburg DMA. Note that all of these subscribers may not have access to Fox Sports Sun. This is significantly larger than the Cardinals' media territory which has 5.1 million subscribers and a core market of 1.2 million as well as the Diamondbacks' territory which has 4.1 million subscribers and a core market of 1.6 million subscribers. However, the Cardinals always have high ratings and had an average of 94,000 viewers per game in their core media market in 2017. The Diamondbacks had above average ratings and on average 66,000 viewers per game. The Rays have below average ratings and only 52,000 viewers per game in their core market. Unlike the Cardinals and Diamondbacks, the Rays don’t have particularly good attendance, suggesting limited interest in the Rays. The Rays may have a stronger market than either the Diamondbacks or Cardinals, but both those teams have stronger fan interest.

The Orioles/Nationals shared media market is far larger than the Rays, Cardinals or Diamondbacks media market but includes two teams instead of just one. MASN's core DMAs of Washington and Baltimore are roughly the same size as Miami and Tampa Bay combined and has 9.5 million total cable and satellite subscribers as well as 3.2 million subscribers in its inner core. However, MASN has roughly 5.9 million subscribers compared to the Rays 5.6 million subscribers in part due to MASN's failure to gain carriage in North Carolina. Based on solely a market size analysis, it would be reasonable to expect the Nationals and Orioles combined to receive slightly higher media fees than the Rays and Marlins combined. That stated, the Nationals and Orioles have higher ratings than the Rays and Marlins and are in more valuable markets making them clearly more valuable properties.
It is hard to determine how much MASN will pay the Nationals and Orioles in media rights fees because the rates are set to change every five years based on network revenue. In addition, Allen and Co, MASN, the RSDC and the Nationals each have their own drastic ideas of how fair media rights should be determined.

Allen and Co, on behalf of Comcast, offered a deal in which Comcast would offer both teams starting in 2012 a media rights fee of $42.5M and increasing by 4% annually until 2032. This would result in both teams earning roughly $1 billion each over the fourteen years from 2019-2032, or roughly the same as what the other teams in this sample are receiving. Given that the Nationals and Orioles are in a stronger market than all of these teams, this offer would be disappointing. Unsurprisingly, MASN didn’t accept Allen and Co’s offer.

Instead, MASN proposed their own rights fee for 2012-2016, as did the Nationals. In addition, the RSDC made a decision about the appropriate rights fee for 2012-2016 that was ultimately overturned. Any attempt at guessing what any of these parties might request over 2019-2032 requires a lot of conjecture.

That stated, MASN offered $45.7M in 2016 with a 7.7% annual increase. That rate of increase projects to roughly $57M in 2019 -- or more than any other team in the sample received. This doesn’t take into account that MASN was likely to receive an increase in revenue as a result of renegotiating its contract deals with other cable providers.

The RSDC felt that $66.7M was fair value for 2016. This is significantly higher than what any other team in the sample received in 2019 -- and presumably the teams’ rights fees would go up from 2017-2019. It’s likely that such an amount would only be reasonable if the Nationals/Orioles shared media territory is significantly more valuable than any of the other teams in the sample.

Meanwhile, the Nationals requested $127.4 million in 2016. Such an amount would be larger than any of the teams in the sample received in 2032. It’s likely that the Nationals request for 2019 would be roughly the same as what the Cardinals, Rays and Diamondbacks receive all together. This seems to be an awfully optimistic request.

Based on my understanding of the economics, I project that MASN's offer was on pace to be worth $1.45 billion over the fourteen year period, the RSDC's offer was on pace to be worth $2.1 billion over the fourteen year period and the Nationals' offer to be worth $3.7 billion over the fourteen year period. If so, the deals look like this.

These graphs always look a bit weird when I include the Nationals' request. Here's how the chart looks without them.

It appears that the Rays' media deal appears to be fair value compared to what the Diamondbacks and Cardinals received. It is likely that the Rays will receive less in media rights fees than what the Nationals and Orioles will receive in rights fees from MASN, but that is because the Nationals'/Orioles' media territory is more valuable. This media deal isn’t going to change the Rays' financial situation and likely means they’re going to struggle to maintain a competitive payroll going forward.

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